With nearly two million eligible married and civil partner couples still to claim their marriage tax allowance (HMRC stats) and with millions of pounds of tax entitlements going unclaimed each year, we take a quick look at 8 legitimate ways to reduce your tax bill and make use of a number of tax allowances on offer.
- Marriage Allowance
The marriage allowance permits a spouse or civil partner who does not pay income tax to transfer up to £1,150 of their personal allowance to their husband, wife or civil partner if they earn more than you.
This reduces their tax by up to £230 in the current tax year. Backdated claims can be made to any tax year since 5 April 2015 providing you were eligible.
One half of the couple must earn less than £11,500 a year, while their partner must be a basic rate taxpayer, meaning they earn between £11,001 and £45,000 in the current year.
HMRC will give your partner their extra allowance by either changing their tax code or when they complete their self-assessment tax return.
For those born before 6 April 1935, there is an even better allowance available which HMRC is phasing out which could give you a potential reduction on your tax bill of up to £844.
- Claim All Allowances
Those who are self-employed can claim for the extra costs involved in running a business from home. This can include lighting, heating, council tax, property insurance, repairs and even mortgage interest. These costs can be offset against profits, reducing your overall tax bill. If part of a property, even a single room, is devoted entirely to the business then there may be a CGT charge when the property is sold. This point needs to be considered before a claim is made.
- Pension Planning
Individuals can save up to 100% of their earned income (subject to a cap), or £3,600 (if higher) into a basic pension. It may be tax efficient for those subject to the high income child benefit charge (based on earnings between £50,000 and £60,000) to reduce their liability through making a pension contribution. This in effect reduces their income below the threshold ensuring no tax on the benefit is payable.
It may be also be tax efficient for those earning over £100,000 to preserve their personal allowance by making a contribution into a pension scheme.
If directors of small companies find they are using up their personal and dividend allowance, one handy way of reducing their tax bill is by making pension contributions.
They can use retained profits in a company and contribute directly into a pension, which reduces their corporation tax charge as there is less money left in the business.
- Private Tax Efficient Investments
It’s not just ISAs that offer tax breaks. Private investments are a chance to commit your money to another business, helping early stage companies reach their next level of growth.
The most common tax efficient schemes for investing in smaller companies are Enterprise Investment Schemes (EIS) and Venture Capital Trusts (VCTs). Income tax on both investments is 30% for 2017/18 with a maximum annual investment of £1,000,000 and £200,000 respectively.
In the Autumn Budget, the Chancellor announced plans to double EIS investment limits for knowledge intensive companies.
- ISAs and LISAs
The general ISA subscription limit is £20,000 for 2017/18.
You can use a Lifetime Individual Savings Account (LISA) to buy your first home or save for later life. You can put in up to £4,000 each year, until you’re 50. The government will add a 25% bonus to your savings, up to a maximum of £1,000 per year but there are certain restrictions on when you can withdraw your assets.
The Lifetime allowance of £4,000 counts towards your annual ISA limit.
- Check Your Tax Code
Even the taxman can get things wrong, particularly if you move jobs, get promoted or change your employment status.
Your PAYE (pay as you earn) code determines how much tax you pay. It is down to you to make sure you are on the right code, otherwise you can be paying too much tax.
The most common mistake is to put someone on an emergency tax code when they get a new job or change their job title. This could make you £2,700 a year poorer (in the short term) as you will lose your £11,500 a year personal allowance and find all of your income is taxed.
- Small Gift Allowance
There are a number of little-known exemptions allowing you to reduce future inheritance tax bills. Everyone has an annual gift exemption worth £3,000, which removes this money from your estate regardless of how long you live.
In addition, grandparents can give £2,500 to each grandchild who marries; parents can give £5,000. Wealthier taxpayers can also make regular gifts out of income, which will also be IHT-free.
These can be paid monthly, annually or even termly, if, for example, it was to help pay school fees. Get your relative to write a letter stating that it is their intention to make this a regular gift from their excess income. Provided that they can maintain their current standard of living, there is no limit on how much they can gift this way.
With other gifts, people have to survive the transfer by seven years for it to be disregarded for inheritance tax purposes.
- Joint Ownership
For assets, likely to trigger a capital gain (such as property or shares), it may be worth owning them jointly. Much will depend on how much income they generate, when you are likely to sell them and the size of a potential gain.
If a buy to let property is held in joint names for example, you will be able to use both spouses’ CGT allowance.
If shares are sold and each spouse is liable to pay tax at a different marginal rate then consider reassigning ownership prior to sale in order to potentially reduce your overall liability.